OKAY – well done, you finally landed this very cool job at a new start-up, and part of your remuneration includes shares of a publicly unlisted company. Despite all the talk amongst your friends and fellow office workers about working for the greater good of the world you can not help but think about filling your bank account faster than a rocket booster. But you need your company to do well, very well and oh yeah let’s not forget you eventually need someone to sell your shares to, right?
OKAY – you got a problem, your “über-cool” job at a new start-up is not so new anymore, and things are going a lot, I mean a lot slower than you thought. You are still forking over cash for your daily groceries and rent for your apartment. You have no idea what your shares are worth but are reading alarming articles about “down rounds” at many start-ups, which means your shares are getting worth less. Huh? Not exactly the direction of a rocket booster, is it? Houston, we got a problem.
OKAY – you are panicking. It has been three years of sweating 90-hour weeks, no social life and the cocoon you have been living in is getting worse than stale. Management and the board of your company keep up good appearances and talk the talk, but it feels like a lot of fluffing and no walking. You have a friend who used to work as an investment banker on the East coast, which industry characteristics seemed to have migrated to Silicon Valley. You call for advice as to the value of your shares and more importantly how to get rid of them before you lose them all by quitting before being vested. You want to bail out and get a real job, help!
You see, it is not easy being an owner of equity shares, let alone of unlisted company shares whether you are an employee, owner or an investor. The fate of the value of equity shares is the same for all, at least in theory. We also know it is much easier to divide a baked pie than to divide a promise to bake a pie. Companies, which have been in business for years, with known and published financial track records, are easier to value than start-up companies where the promise of financial returns has to be made good in the future.
Many of us, private investors, mutual funds, professional investors and future employees are drawn to the winner-takes-all promise where the winnings are outsized and potentially impact our overall financial performance. We feel the thrill and lure of a potential super-win but discard the notion that luck is much more in play than skill is. Like playing the lotto, the game is set up to have only a few winners, which implies having many losers and a natural tendency for some players to stack the game in their favor.
That is why it is surprising to see so many people involved in what is now a significant new industry: Private Equity or in laymen’s terms buying or owning shares of unlisted companies. It seems several people are exposed to unlisted shares in start-up companies while not particularly trained or skilled in evaluating promises. Caveat Emptor.
OKAY – we got your point Vincent but how about telling us what my shares are worth and where can I sell them?
Yes, I am sorry I have a lot on my mind these days. First, as an owner of unlisted shares you need to know how many shares were issued by your company and, if there are various classes, which one you own (owner/seed A, B, C, etc.) You will find out that the different share classes have different values and protection clauses attached to them and that the total number of shares increases over time, which decreases your part of the overall pie. You don’t care as long as the pie grows faster than your shrinking cut. As an employee-owner, you likely have a vesting schedule, which you should know about to tell if and when you own how many shares.
As to selling your shares, you first need to check if you signed any selling conditions. Start-up companies often have “right of first refusal” clauses, where the company has specified a first right to buy the shares from you. If waived, you should check whether there is a restricted list set by your firm.
Only after meeting these obligations will you be able to contemplate selling your unlisted shares on exchanges that deal in them; these are called gray markets. But there are many shades of gray and new ventures like Equidate, EquityZen, and 137 Ventures have launched in the US and Europe, creating derivatives meant to bypass private company share restrictions. You should also check the Nasdaq-traded Sharespost 100 Fund (PRIVX), a platform allowing private businesses to organize the secondary sale of shares on behalf of their employees.
Know your limitations in dealing with equity shares of start-up companies. Experience is not the same as expertise, and luck is not the same as skill. Have a look at Rocket-Internet, a German listed incubator of global copy-paste Internet companies. Its shares are down 53% since the IPO value of $8 Billion in 2014 or read about the epic blow-up of some the most loved unicorns. At i-Cthru, we depend on a lot of skills built into our investment process, which uses only audited public financials and publicly traded price data. The skills in this process will become more apparent as time passes and luck plays only a small part in our success. There is a difference, and it counts. We will likely not have a moonshot, but that is not our intention.
Beware of the games you play: what is your color gray?